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Climate change funds efficient source of profit

Kathleen Brooks
AS THE western world enters the age of austerity, finding sectors with strong growth potential will be the challenge for investors. Climate change is one area that has astounding prospects.

The International Energy Agency (IEA) estimates that between $1 trillion and $2 trillion a year will need to be invested over the medium to long term to develop alternative energies to reduce carbon emissions in a meaningful way.

Climate change has come into focus in recent years and the investment case has become extremely compelling. “Where are you going to put your money in the next few years? Oil companies, banks and consumer stocks don’t look that attractive anymore. You have to find areas that will grow faster than the economy as a whole,” says Clare Brook, joint founder of Wheb Asset Management, which runs a £20m environmental fund.

There is a wide universe of companies that can be included in such a fund, says Simon Webber, fund manager at Schroders’ Global Climate Change fund. “We particularly like companies that provide video conferencing facilities, thereby reducing the need for business travel, and energy efficient lighting,” he says.

Webber likes Phillips, which generates a third of its profits in the lighting industry, Honda, BG Group and Schnitzer Steel, a US company that produces steel in a less carbon-intensive way.

Charles Gooderham, director at Deloitte, says that right now carbon is cheap: “People need to think five years into the future when carbon is likely to be much more expensive.” Companies that become more efficient now will have lower costs in the future.

But what about performance? Wheb, which launched in June 2009, returned more than 14 per cent in the past year, easily outperforming the S&P Alternative Energy index. Schroders’ fund, which has $187m under management, has been running for the last three years, returning more than 18 per cent in the past year.

During the crisis, alternative energy stocks were very volatile. To counteract this, Wheb’s Brook blends a demographic theme – an ageing population – into her climate change fund: “We invest in companies that provide the nuts and bolts to help the human body and delay the decaying process. These stocks have totally different characteristics from climate change stocks because they have fairly low volatility and provide us with a safe haven.”

A cleaner, more energy efficient society is the future for both developed and developing markets and investors should not ignore this important theme.